The European Monetary System Lessons from Europe and Perspectives in Europe

Abstract: In the debate that surrounds the proposals for a reform of the international monetary system the EMS experience is often referenced. These frequent references to the EMS have lacked so far a review of the system aimed at identifying which lessons — i f any — one can draw from this experi ment at l imi t ing exchange rate flexibility. Analyses of the EMS have been l imited to Europe, and have never been brought to bear on the wider question of world monetary arrangements. This is the aim of the first part of the paper. The second part looks at what lies ahead in Europe, asking whether the EMS can survive the current process of rapid financial integration, and what are the prospects for monetary unification. I first discuss the effect of financial integration on public finances, and then I analyse the major development in Europe since the beginning of the EMS: the plan to create a unified financial market. The paper ends wi th a word of caution on the "financial integration strategy": financial inte gration and further progress toward monetary unification wi l l not succeed unless they are accompanied by sweeping fiscal reforms. hen the EMS was launched in 1978 the new plan for exchange rate Y Y stabili ty in Europe was accepted w i t h much skepticism. Policy-makers sti l l were influenced by the collapse of Bret ton Woods, and concentrated o